Which Trust is Right for You?
When it comes to estate planning, wealth management, and asset protection, different trust types serve different specialized purposes. The following are the most commonly used and tend to be the most relevant to everyday estate planning scenarios:
Trust table
1. Revocable Living Trust
What Is It?
A revocable living trust is created during your lifetime and can be altered, amended, or even revoked at any time, as long as you’re mentally competent.
Who Is It Suitable For?
You want flexibility and control over their assets.
You avoid probate, ensuring a more private and quicker transfer of assets upon death.
You anticipate changes in personal or financial circumstances and want the ability to modify the trust.
You are just not sure.
Key Benefits
Avoids or simplifies probate.
Maintains privacy (trust documents generally do not become public record).
Offers continuity of asset management if you become incapacitated.
Potential Drawbacks
Does not provide strong creditor or lawsuit protection once you pass away (less asset protection when compared to an irrevocable trust).
Costs to set up and maintain may be higher than having a simple will, although it can save money in probate costs later.
2. Irrevocable Trust
What Is It?
An irrevocable trust, once established, cannot typically be modified or revoked except under very limited circumstances. Control of the assets and the power to amend trust terms are relinquished.
Who Is It Suitable For?
You are concerned with asset protection (for instance, business owners, professionals at risk of litigation).
High net-worth individuals aiming to limit estate taxes or ensure assets are sheltered.
You want to gift assets to beneficiaries while removing them from their own estate.
Key Benefits
Strong protection from creditors once assets have been transferred into the trust.
Can reduce or eliminate estate taxes if structured properly.
Potentially keeps assets growing outside of your taxable estate.
Potential Drawbacks
Lack of flexibility: it’s difficult to change terms or withdraw assets once they are in the trust.
Costs and complexity of setup can be higher than a revocable trust.
3. Testamentary Trust
What Is It?
A testamentary trust is created as part of a will and takes effect only after the person passes away. It does not exist as a separate entity during the grantor’s lifetime.
Who Is It Suitable For?
You prefer a simpler arrangement while alive but still want trust protections or distribution rules for beneficiaries after death.
Parents who want to ensure minor children or other beneficiaries only receive assets in a controlled manner.
Key Benefits
Can impose conditions on how and when beneficiaries receive assets (e.g., only upon reaching a certain age or milestone).
Less expensive up front since the trust is only activated after death.
Potential Drawbacks
Must go through probate, because it’s tied to the will.
No lifetime advantage, such as incapacity planning or avoiding probate for assets.
4. Special Needs Trust (SNT)
What Is It?
A special needs trust is designed for beneficiaries with disabilities. It ensures the beneficiary can still qualify for government assistance (Medicaid, Social Security Income, etc.) by keeping trust assets separate from their personal assets.
Who Is It Suitable For?
Families with a child or other dependent who has long-term special needs and relies on public benefits.
You want to ensure your loved one will have additional financial resources without compromising government benefit eligibility.
Key Benefits
Assets can be used for extra care and quality of life expenditures (housing assistance, medical treatments not covered by government benefits, education, etc.).
Preserves eligibility for critical government aid.
Potential Drawbacks
Must be carefully drafted to meet complex legal requirements.
Limited use of trust funds to avoid disqualifying the beneficiary from assistance programs.
5. Charitable Remainder Trust (CRT) or Charitable Lead Trust (CLT)
What Are They?
Charitable Remainder Trust (CRT): You transfer assets into a trust. The trust makes payments to you (or another non-charitable beneficiary) for a set period or for life. After that period, the “remainder” goes to a named charity.
Charitable Lead Trust (CLT): A charity receives an income stream from the trust for a set term, after which the remaining assets revert to your designated beneficiaries (often family members).
Who Are They Suitable For?
You want to support charitable causes while also benefiting from tax deductions.
You wish to create an income stream for themselves or others with the eventual aim of leaving assets to charity or vice versa.
Key Benefits
Potentially significant tax advantages (income tax deduction, estate tax deduction, capital gains tax minimization).
Helps fulfill philanthropic goals.
Potential Drawbacks
Usually more complex to set up and administer.
Irrevocable trusts can’t be easily altered once established.
6. Dynasty Trust (Generation-Skipping Trust)
What Is It?
A dynasty trust is designed to last for multiple generations—sometimes indefinitely, depending on state law. It can pass assets from one generation to the next while potentially avoiding repeated estate taxes.
Who Is It Suitable For?
High net-worth families aiming to preserve wealth across multiple generations.
Those looking to minimize estate, gift, or generation-skipping transfer taxes.
Key Benefits
Long-term preservation of family wealth.
Can protect assets from creditors or divorce claims against future generations.
Potential Drawbacks
Complexity and higher setup and administration costs.
Strict rules vary by state (some states have a “Rule Against Perpetuities” limiting the length of time a trust can exist).
